Amazon’s Marketplace Policies Could Deter Small Retailers

Amazon has implemented policies that could increase participation costs for some small businesses

As of November 1, the online retail giant would include prepaid return labels with orders from certain third-party sellers — and automatically authorize those returns

Third-party sellers now account for nearly half of Amazon’s total sales

Amazon currently dominates the U.S. e-commerce market, offering shoppers easy, around-the-clock access to the products they want. The Amazon marketplace therefore teems with third-party sellers eager to gain exposure to its audience of tens of millions of consumers. Recently, though, Amazon has implemented certain policies that could increase participation costs for some small businesses, capped by an email announcement that, as of November 1, the online retail giant would include prepaid return labels with orders from certain third-party sellers — and automatically authorize those returns.

The declaration was an unpleasant surprise for those retailers, particularly since it came just as the holiday shopping season was getting underway in earnest. Online return policies are already a contentious issue, and Amazon’s unilateral decision to impose upfront shipping fees on third-party merchants could cause many of them to re-examine their participation with the marketplace.

The Rewards of Participation

For retailers, the power and appeal of Amazon’s platform remain unquestioned. There are an estimated 65 million Amazon Prime members in the United States, a 38% increase from a year ago. Although 19% of them are believed to be monthly rather than annual members, those consumers are unlikely to cancel during the holiday shopping season. Substituting the $10.99 monthly fee for the $99 annual fee could also make the renewal decision more palatable to many shoppers, boosting Amazon’s already-high conversion rate.

Prime’s renewal rate is even more impressive: 91% of first-year members sign up for a second year, and 96% of them stay for a third year. Better yet for Amazon, Prime members spend over four times more at Amazon per year ($2,486) as non-Prime customers ($544), on average, and over 40% of Prime members spent at least $1,000 at Amazon in the past 12 months. Plus, members spend significantly more at Amazon the longer they’re in the program.

Given all that, it’s clear why Amazon continues to enhance Prime — even though the annual fee doesn’t even cover the average member’s free 2-day shipping costs, let alone the rest of the benefits. It’s also clear why so many retailers participate in the Amazon marketplace: They want ongoing access not just to Prime members, but to Amazon’s 300 million customers around the world. After all, 55% of consumers’ product searches begin on Amazon, 90% of consumers comparison-shop on Amazon even after they’ve found what they want on another retailer’s website — and 78% do so “often or always.” To compete for these shoppers, merchants need to maintain a presence on the Amazon marketplace.

The Costs of Participation

Amazon naturally wants to preserve its reputation as a trusted, low-cost, high-quality retail site. It’s therefore taken steps to address a variety of issues that could harm its customers’ shopping experiences. Unfortunately, some participating sellers have to deal with the obstacles created by such steps, including:

Its crackdown on counterfeit products and deceptive sales tactics. New merchants that sell certain brands must pay a fee of up to $1,500 and provide recent proof-of-purchase invoices from brand manufacturers or distributors. While this will help thwart counterfeiters and arbitrage sellers, it creates a barrier to entry that can also hinder small, legitimate sellers.

Its banning of incentivized reviews. A recent analysis found that people who received discounted or free products in exchange for their opinions offered much more complimentary reviews than did consumers who paid full price. While incentivized reviews are now disallowed, most of the existing ones still appear on the various product pages, which does a disservice to other sellers (and customers).

Its shopping algorithm. Amazon’s products tend to appear in the “buy box” (which accounts for 90% of Amazon sales) even when other merchants’ prices are considerably lower. To increase their chances of claiming that spot, sellers are encouraged to become fee-paying members of the Fulfillment by Amazon (FBA) program and allow their orders to qualify for free, 2-day shipping to Prime members. This can adversely affect some sellers’ bottom lines.

It was against this backdrop that Amazon informed non-FBA-participating retailers of its new return policy, which states, in part: “Starting on November 1, 2016, US seller fulfilled returns that are within Amazon’s returns policy will be automatically authorized, and Amazon will provide customers with prepaid return labels on your behalf,” Amazon framed the change as a positive move because it will reduce the time that sellers need to spend on processing returns.

As noted earlier, the question of who should absorb return shipping costs has concerned retailers and consumers since e-commerce became popular (if not earlier). Online shoppers are much more likely to place orders with and return to retail sites that pay for those charges, but easy return policies increase the chances for a wide range of fraud abuses. The trade-off between higher costs and more confident customers often leads merchants to adopt shopper-friendly approaches, but retailer-specific circumstances can sometimes tip the scale in the opposite direction.

More than a few non-FBA sellers therefore don’t care for the new policy. They worry that they’ll see a wave of post-holiday returns. While they can appeal returns on a case-by-case basis, they’re also afraid they won’t be able to withhold refunds and/or charge return shipping or restocking fees on damaged items without risking significant customer backlash, including low seller ratings. Smaller sellers in particular also use these fees to recoup at least some of the cost of lost sales and inventory; the new policy could severely curtail that option.

Just as critically for merchants, though, Amazon customers are very discerning:

86% won’t place an order on the site unless shipping is free;

91% won’t buy any product that’s received less than three stars in Amazon’s five-star rating system; and

58% “always” check the ratings of third-party sellers when they make a purchase on the site.

What’s more, 73% of Prime members and 63% of non-members trust Amazon over third-party sellers when it comes to shipping their packages, and 31% overall say the name of the merchant factors into their purchase decisions. Sellers clearly need to market their items and themselves as attractively as possible on the Amazon marketplace. Joining the FBA program — and thereby qualifying for Prime deliveries and warehouse returns — could help them do so, but it also involves fees and commissions that may not suit a small business owner’s budget or plans. (This holiday season, Amazon is also limiting warehouse space for new FBA merchants and charging existing sellers more for unsold merchandise that languishes in its warehouses.)

Amazon is free to establish marketplace rules and regulations that support its mission to be "Earth's most customer-centric company.” However, third-party sellers now account for nearly half of Amazon’s total sales, and their continued presence on Amazon.com is a vital part of consumers’ shopping experiences. Non-FBA sellers are unlikely to risk losing holiday sales by leaving the marketplace right now, but they’ll need to closely scrutinize their marketplace results in November, December, and January to calculate the full effect of Amazon’s new policies. Going forward, both sides will need to ensure that the rewards of participation outweigh the costs.

Tom Caporaso is the CEO of Clarus Commerce, a recognized leader in e-commerce and subscription commerce solutions. Among its various properties, Clarus Commerce powers FreeShipping.com, the pioneer of the pre-paid shipping and cashback movement. ClarusCommerce also customizes and manages programs, such as Return Saver, which it co-developed with FedEx, and 2-Day Shipping by MasterCard, for clients across a wide range of industries.